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3 High-Risk/High-Reward Utilities

We think less-traditional utility names Calpine, NRG Energy, and Dynegy could have 20% or more upside, but with very high uncertainty, they're not for the faint-hearted.

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Travis Miller: For investors looking for less-traditional utilities, we've got three to highlight: Calpine, NRG Energy, and Dynegy. All are no-moat, very high uncertainty stocks, but we think they have 20% or more upside. As power prices rise, all three should benefit in the Eastern U.S. They all own power plants that burn coal, natural gas, or, in NRG Energy's case, nuclear.

We think there are three ways that power prices will rise over the next few years and benefit these companies. One, we think regulators in Ohio or the courts will strike down some of the power purchase agreements. Second, we don't think that demand response will become a key part of the market, despite the Supreme Court's approval of including it in the power markets. And third, we think natural gas prices are on their way up as drillers rationalize the supply, and power plants burn increasingly more natural gas.

The three names again are NRG Energy, Dynegy and Calpine. We think they have a long way to run, but they are very high uncertainty and not for the faint of heart.

Travis Miller does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.